Employees and customers are just a few people who might take advantage of your small business. Recognize types of fraud in business and learn how to protect yourself.

Here are a few types of common small business fraud you might face.

1. Identity Theft

Identity theft could cost your business thousands of dollars. Fraudsters could steal your business’s identity and use it to access your credit.

People might get their hands on things like financial statements, bank statements, or your federal tax identification numbers. It’s also possible to have information taken from your computer.

To prevent identity theft, make sure you keep your statements and sensitive information secure. If you have physical copies, keep them locked in filing cabinets that only you can access. For digital copies, make sure you use difficult usernames and passwords, and avoid falling for phishing scams. Don’t hand your information out to anyone.

Fraudsters could also have access to your business bank account if employees lose paychecks. Paychecks are very sensitive since they contain your business’s routing and bank account numbers.

If a lost paycheck gets into the wrong hands, fraudsters could access and withdraw money from your bank account. To limit the damage this could do to your business, consider separating your payroll account from the rest of your business’s money.

Having a separate payroll account means potential fraudsters would only have access to a limited amount of funds. You only deposit enough money to cover employee paychecks with a payroll account.

You might also consider paying employees via direct deposit instead of paychecks. With direct deposit, you put the employee’s wages directly into their account. That way, you do not need to pass out checks with sensitive information. Some states allow employers to enforce mandatory direct deposit.

2. Payroll Fraud

Payroll schemes are twice as common in small businesses as opposed to large companies, according to the ACFE. There are a few different ways that payroll fraud can occur at your business.

Employees might ask for pay advances without paying them back. Or, employees might lie about hours worked on their timesheets. Employees could also get co-workers to clock in for them even if they aren’t at work.

Do background checks on all employees before you hire them. And, you should audit payroll accounts so you can catch fraudulent behavior early on.

Use SaaS payroll services so you can approve payroll before you pay employees and keep track of their pay rate and hours within your system. Don’t wait until your business has doled out huge sums of cash to start keeping an eye on things!

3. Money Fraud

Because there’s so much illegal cash circulating in the United States, you might come across fake bills. Money fraud can happen without you or the customer even noticing. But, counterfeit money is worthless when you go to deposit the cash at the bank.

The most common counterfeit bills are high-valued, like $100 bills. If you accept counterfeit money, you won’t receive any revenue from the sale. Worse, you could end up giving real currency as change for a fake bill.

Protect your small business from money fraud by learning how to tell if money is fake. There are different features you should be able to spot on legal currency, like raised printing, microprinting, watermarks, and color-shifting ink. And, teach your employees to check cash before accepting it.

4. Return Fraud

The majority of small businesses that sell goods have experienced return fraud in one way or another.

There are different types of return fraud. Some customers might purchase a product, use it, then return it even though nothing is wrong with it. Or, you might have fraudsters who steal products from you and attempt to return them to make a profit.

Return fraud can be damaging to your business. You might not be able to wipe out all return fraud, but you can limit it based on your policies.

To prevent return fraud, you can require receipts. And, you could tighten your policies so that customers only receive store credit after a certain time period. Although you want customers to be happy, you also don’t want your business to lose money from fraud.

5. Workers’ Compensation Fraud

Workers’ compensation fraud is another type of small business fraud you could come across if you have employees.

As a business owner, most states require that you purchase workers’ compensation. Workers’ compensation insurance pays your employees if they become injured or ill at work.

There are different ways workers’ compensation fraud can occur, so you need to be vigilant. Employees might get injured outside of work and say they got the injury at your business. Or, employees could make up an illness or injury.

How do you protect your business from workers’ compensation fraud? You need to document everything, keep accurate records, and look out for signs of fake injuries.

I'm founder and CEO of Patriot Software, LLC. I have over 30 years of entrepreneurial experience across five startups. I started Patriot Software in the basement of a factory and grew it into a multi-million dollar company that serves small businesses all across the United S...